News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay

This article was first published 6 years ago
Rediff.com  » Business » How the 'mother of all tax reforms' actually evolved

How the 'mother of all tax reforms' actually evolved

By Shankar Acharya
July 20, 2017 16:14 IST
Get Rediff News in your Inbox:

The story of India’s fledgling indirect tax regime goes back a long way before 2000.
In its essence, GST is a national level system of value added taxation of goods and services, says Shankar Acharya.

A column in July 2017 has to be on the newly launched Goods and Services Tax (GST), indubitably the most significant and complex tax reform undertaken in independent India.

So much has been written on its merits and demerits, there is nothing really new I can add, except to caution that we will only find out the true economic, social and administrative benefits and costs of this nation-wide overhaul of indirect taxes in the months and years ahead.

Instead, I will share a few thoughts on the early years of the evolution of this tax, which is, in its essence, a national level system of value added taxation (VAT) of goods and services.

Many newspaper accounts of GST, including the front page report in Business Standard on July 1, start the story of India’s GST around 2000.

That is misleading, by at least 15 years.

Through the 1970s and right up to 1985, India’s structure of domestic indirect taxes at both central and state levels (and leaving aside the equally complex and badly designed customs tariffs) was a jungle of multiple rates, (about 25 major ones in the Central Excise Tariff alone), hundreds of end-use-specific concessions and exemptions and a conspicuous absence of the key VAT principle of allowing set-offs or credits for taxes paid on inputs used in production.

The consequences for economic efficiency, equity, simplicity and stability were horrendous.

This jungle of taxes was reviewed by the excellent L K Jha Indirect Taxation Enquiry Committee Report of 1978.

One of its major recommendations was to replace the Central Excise Tariff by a manufacturing level VAT, “MANVAT”.

As with many good government reports, this one gathered dust for nearly eight years, until V P Singh became finance minister in the Rajiv Gandhi Congress government and launched modern tax reform in India.

In his first (1985) Budget he undertook major reforms of direct taxes and committed to delivering a Long Term Fiscal Policy (LTFP) statement within a few months.

By a happy (for me) coincidence I had joined the finance ministry as Economic Advisor in February 1985 from the National Institute of Public Finance and Policy.

Within a few weeks, I was tasked by Chief Economic Advisor (CEA) Bimal Jalan to be the anchor official for preparing a draft LTFP document.

It was a fascinating and fulfilling opportunity to bring my academic training and international experience to the ground realities of fiscal policy-making in India.

Under Jalan’s able leadership and intellectual guidance we were able to coordinate effectively with key colleagues in the Revenue and Expenditure departments and Montek Ahluwalia in the Prime Minister’s Office (PMO).

Within about three months we had a draft LTFP which we discussed page by page in a series of meetings taken by the finance minister, with those present including finance secretary S Venkitaramanan, revenue secretary Vinod Pande, Montek from PMO, Jalan and myself.

The LTFP, which was laid in Parliament in December 1985, was an unique policy document marrying a medium-term public financial programme with a detailed agenda of direct and indirect tax policy reforms.

The flagship reform in the chapter on indirect taxes was to usher in “a modified system of VAT, or ‘MODVAT’ for short”, whose key objective was to “progressively relieve inputs from excise and countervailing duties” through a comprehensive system of credits and set-offs in the central excise duty structure.

Two months later, V P Singh’s 1986 Budget duly implemented MODVAT in 37 chapters of the Central Excise Tariff.

This marked the first serious beginnings of VAT/GST principles in India.

In my next 15 years in the finance ministry (the last eight as CEA), I maintained an abiding interest in tax policy reform and was fortunate to work with mostly receptive and supportive finance ministers, and finance and revenue secretaries.

As regards VAT/ GST, other pieces fell into place gradually: MODVAT was extended to virtually the entire domain of central excises, the hundreds of end-use specific exemptions were chipped away, the large number of excise tax rates was whittled down, services taxation was introduced (in 1994) and rapidly expanded in scope and coverage, and, by 2000, major initiatives had been launched to reform State sales taxes into VAT format.

In this long (and not always linear) journey, a personal high point for me occurred during the preparations for Yashwant Sinha’s Budget of 1999/2000.

As usual, the long meetings of the “Budget group” (finance minister, secretaries and CEA) on indirect tax policy were held in the specially secure, “engine room” of the Commissioner, Tax Research Unit of the Central Board of Excise and Customs (then the very able and reform-minded T R Rustagi).

As we searched hard for ways to reduce the number of excise tax rates, I was able to help with some acceptable rules of thumb to collapse the extant eleven major excise tax rates (ranging from 5 to 40 per cent) into just three (8, 16 and 24 per cent), buttressed by two non-Modvatable additional special excises of 6 and 16 per cent on a handful of luxury consumer goods.

The following year, 2000, the Budget group, led by Yashwant Sinha, conflated these three rates into a single CENVAT rate of 16 per cent, along with three non-rebatable special excises of 8, 16 and 24 per cent.

Of course, a great deal more had to happen in the years beyond 2000 to arrive at the landmark inception of GST on July 1, 2017.

And compromises had to be made to amend the Constitution, enact the necessary legislation in Parliament and State Assemblies and retain consensus in the GST Council over the past year.

But the story of India’s fledgling GST goes back a long way before 2000. And I was privileged to play a small part in that story.

Shankar Acharya is Honorary Professor at ICRIER and former Chief Economic Advisor to the Government of India. The Views are personal

Photograph: Adnan Abidi/Reuters

Get Rediff News in your Inbox:
Shankar Acharya
Source: source
 

Moneywiz Live!